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Brussels, 06.11.1996 COM(96) 560 final

REPORT ON CONVERGENCE IN THE EUROPEAN UNION

IN 1996

(prepared in accordance with Article 109j(l) of the Treaty)

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CONTENTS

~gc

1. INTRODUCTION 5

2. COMPATIDILITY OF NATIONAL LEGISLATION 'WITH THE TREATY AND THE STATUTE OF THE EUROPEAN SYSTEl\1

OF CENTRAL BANKS 7

2.1 Adaptation of national law since the signing of the Treaty 2.2 Recapitulation of relevant provisions of the Treaty and the

ESCB Statute

2.3 Review of national legislation 2.4 Current legislative initiatives

Box: Review of central bank legislation: some illustrative cases

3. PRICE STABILITY 3 .I Treaty provisions

3.2 Price stability as assessed by the II CPs

3.3. Inflation performance during the second stage of EMU 3.4 The sustainability ofprice convergence

Box: Calculation of the inflation reference value Box: Differences between llCPs and CPis 4. GOVERNMENT BUDGETARY POSITION

4.1 Existence of an excessive·deficit 4.2 Budgetary developments in 1996

4.3 Progress with budgetary consolidation during the second stage ofEMU 4.4 Sustainability ofbudgetary convergence

Box: Excessive deficit procedure 5. EXCHANGE RATES

5 .I Treaty provisions

5.2 Further analysis of exchange rate stability 6. LONG-TERM INTEREST RATES

6.1 Interest rate convergence

6.2 Recent developments in long-term interest rates 6.3 Explanatory £1ctors and assessment

Box: Data and reference value for the interest rate convergence criterion 7. SUPPLEMENTARY INFORMATION

7.1 Development ofthe ECU

7.2 Results of the integration of markets

7.3 Situation and development ofbalances of payments on current account 7.4 Examination of development of unit labour co·sts and other price indices CONCLUDING SUMMARY

8.1 General assessment

8.2 Summary by Member States

19

32

45

50

59

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3.1 Inflation convergence 3.2 The average rate of inflation

3.3 Private consumption deflator and consumer price index

3.4 Inflation convergence according to alternative methods for the calculation of the reference value, IICP

3.5 . Difference between IICPs and CPis

3.6 Inflation convergence using IICPs and CPis 4.1 General government deficit

4.2 General government gross debt

4.3 Changes from previous year in the actual and cyclically adjusted general government deficit

4.4 Cyclical adjustment of government deficit in 1996 4.5 Factors, other than the deficit, adding to the debt stock 4.6 Revenue and expenditure shares, 1993 and 1996 4.7 Government investment and deficit

4.8 Objectives for the general government deficit in 1997 6.1 Long-term interest rate convergence in the.Member States · 6.2 Development oflong-term interest rates

6.3 Recent evolution oflong-term interest rates 7.1 Current account balance

7.2 Labour costs

7.3 Import price inflation

7.4 Contribution of import prices to the change of the final uses deflator 7.5 Nominal effective exchange rate changes relative to 23 industrial countries 7.6 Effects of indirect tax changes on consumer price inflation

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GRAPHS:

3.1 IICP for EUR and Member States

3.2 Interim indices of consumer prices (IICP) 4.1 General government deficit

4.2 General government gross debt

4.3 Government deficit and debt ratios, 1993-96

4.4 Actual and cyclically adjusted government deficit, EUR 5.1 ERM grid spread

5.2 Movements within the ERM band

5.3 Stability 'of exchange rate vis-a-vis the DM 6.1 Recent evolution of long-term interest rates 6.2 Long-term interest rate convergence

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1. INTRODUCTION

This report has been prepared in accordance with Article 1 09j(l) of the Treaty which requires the Commission to report to the Council on the progress made in the fulfilment by the Member States of their obligations regarding the achievement of economic and monetary union (EMU). The European Monetary Institute (EMI) is similarly required to report to the Council.

These reports are the first steps of the procedure set out in Article 109j which leads to the Council, meeting in the composition of the Heads of State or Government, deciding for the first ,time, not later than31 December 1996, whether a majority ?f the Member States fulfils the necessary conditions for the adoption of a single currency and whether it is appropriate for the Community to enter the third stage.

In practice it has been clear for some time that, despite the considerable progress made by Member States with all aspects of convergence and with other preparations for EMU, a majority of Member States has not yet achieved a sufficiently high degree of sustainable convergence. This is notably because many Member States have not yet reached a satisfactory situation as regards the sustainability of the government fmancial situation. The European Council in ·Madrid in December 1995 already came to the conclusion that conditions would not be appropriate for an early start to the third stage but confirmed that the thirdstage of EMU would indeed begin on 1 January 1999. This agreement on the starting date wa5 reiterated by the European Council in Florence in

J

June 1996. The decisions about which Member States will be in the first group adopting the single currency will be made as early as possible in 1998.

The role of the present report, apart from meeting the formal requirements of the Treaty, is thus, firsf, to examine the current state of. convergence and of the compatibility of national legislation with Treaty obligations and, second, to review the progress that has been made since the beginning of stage two ofEMU on 1 January 1994.

The structure of the report follows that established by Article 109j(l). Chapter 2 examines the compatibility betWeen each Member State's national legislation (including the statutes of its national central bank) and Articles 107 and 108 of the Treaty and the Statute of the ESCB. The following four chapters (Chapters 3-6) examine in tum the convergence performance· of the Member "States in relation to each cif the four criteria, concerning price stability, the government budgetary position, exchange rates and long-term interest rates. Chapter 7 looks at developments in several other areas that arc to be taken account of in the Commission and EMI reports: development of the ECU, the results of the integration of markets, the balances of payments on current account, and unit labour costs and other price indices. A final chapter (Chapter 8) suminarises the conclusions of the report.

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Similarly, although the United Kingdo111 has notified the Council, in accordance with paragraph 1 ofProtocol No 11, that it docs not intend to move to the third stage in 1997, it might do so later and developments in the United Kingdom have also been included in this report.

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2. COMPATIBILITY OF NATIONAL LEGISLATION 'VITH· THE TREATY AND THE STATUTE OF THE EUROPEAN SYSTEM OF CENTRAL BANKS

According to the second sentence of Article 1 09j(l) of the Treaty, the reports drawn up under ·this article ''shall include an examination of the compatibility between each A1ember State's national legislation, including the statutes of its national central bank, and Articles 107 and 1qs ofthis Treatymzd the Statute of the ESCB".

The present chapter is devoted to this examination. The first section summarizes adaptations of national Jaw since the signing of the Treaty on European Union in Februal)' 1992. The second section includes a recapitulation of the relevant provisions of the Treaty and the ESCB Statute. The third section summarizes the results of a review of national central bank legislation in the light of these provisions; it indicates types of provisions which arc still found to be incompatible with. the requirements of the Treaty or the Statute and which arc expected to.bc changed before the establishment of the ESCB. The fourth section indicates legislative refon!1S which are at present planned in the perspective of the _third stage.

2.1 Adaptation of national law since the sig~ing of the Treaty

Since the signing of the Treaty on European Union .and its cntl)' into force, statutes of many national central banks (NCBs) have been adapted in order to comply with the Treaty.

Some of these changes aimed at ensuring compliance with Article 104 which prohibits central bank credit to the public sector and with Article 1 04a which prohibits the granting ofprivilegcd.access by governmental or public bodies to financial institutions. These rules arc in force since the beginning of the second stage. Member States have adapted their reguiatol)' framework in a satisfactol)' manner to these requirements, so that no significant difficulties have occurcd.

The statute of the Banque de France was amended in 1993. The responsibility for. the formulation and the implementation of monet:ll)' policy has been vested in a "Moneta!)' Policy Council", which must not seck or accept instructions from the government or any other body, whilst a "General Council" carries out all other management responsibilities at the bank. Furthermore, the objective of the bank to ensure price stability has been redefined.

The legal regime of the Banco de Espana was adapted in 1994. The law established price stability as the primal)' objective of monet:ll)' policy which is to be defined and implemented by the bank. Neither the ·government nor any other public authority may give instructions to the bUnk regarding either the objectives or the implementation of

moneta!)' policy. ·

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definition and implementation of monetary policy, the conduct of foreign exchange operations, the holding and management of official foreign reserves and the promotion . ofthe smooth operation ofpayment systems.

In Italy, the authority to determine the discount rates has been transferred from the Minister of the Treasury to the Governor of the Banca d'Italia in 1992. Furthermore, the Banca d'Italia has been given the responsibility for setti~g res'erve requirements within certain limits and for overseeing payment systems.

In Portugal, the amendments of the law on the Banco de Portugal were adopted in 1995. The law, inter alia, redefined the primary objective of the bank, i.e. to maintain price stability, taking into account the overall economic policy of the government.

2.2 Recapitulation of relevant provisions of the Treaty and the ESCB Statute Article 107 of the Treaty ensures that the ESCB will operate free from instructions from third parties. It reads as follows:

"TV/zen exercising the powers and carrying out the tasks and duties conferred upon tlzem by this Treaty and the Statute of the ESCB, neither the ECB nor a national central bank, nor any member of their dccision-maldng bodies shall seck or take instmctions from Community institutions or bodies, from any govemment of a A1embcr State or from any other body. The Community institutions and bodies and the governments of the Member. States undertake to respect this principle and not to seek to influence the members of the decision-maJ .. :ing bodies oftlze ECB or of the national central banks in the performance of their tasks."

.· Articie 108 of the Treaty· obliges Member States to adapt national legislation

ill

accordance with the requirements of EMU:

''Each Member State shall ensure, at the latest at the date of the establishment of the ESCB, that its national legislation including the statutes of its national central bank is compatible with this Treaty and the Statute of the ESCB."

The article refers to the compatibility of national legislation with the Treaty's provisions in general. This includes compatibility with Article 1 05(1) of the Treaty· which defines the objectives of the ESCB, the first two sentences ofwhich read as follows:

"Tize primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the .ESCB shall support the general economic policies in the Commulzity with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2."

. . . ., .

The Statute of the ESCB 1 includes in its Article 14 .. 2 rules on the security of tenure:

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"The statutes of the national central banks shall, in particzilar, provide that the term of office of a Governor of a national central bank shall be no less than five years.

A Governor may be relieved from office only

if

he no longer fulfils the conditions required for the pe!Jormance of his duties or

if

he has been guilty of serious misconduct... "

By each of these four provisions, limits arc put on national central bank legislation: • The prohibitions and obligations formulated in Article 107 apply equally to both the

ECB and the NCBs in so far as the performance of ESCB-rclatcd tasks is concerned. While the prohibitions formulated in the iirst sentence of Article I 07 arc addressed to the NCBs and to their decision-making bodies, it appears that rights of third parties to give instmctions in some fonn or other arc incompatible with the prohibitions. Furthermore, any national provisions of which the purpose or effect is for the government to seek to influence the members of the decision-making bodies of the NCB in the performance of their tasks therefore need to be brought, in line with the second sentence of Article 107. The term "decision-making bodies" should be understood to mean any organ of an NCB whose decisions may have an impact on the fulfilment of its ESCB-related tasks.

• The primary objective formulated in Article 105(1) is assigned to the ESCB, which according to Article 1.2 of the Statute is composed of the ECB and the NCBs. Therefore, the objective of each member of the ESCB ffi}lSt be compatible with Article 1 05(1).

• Article 14.2 of the ESCB Statute is exclusively addressed to NCBs; non-compliance with the limits set therein will require adaptations of national law.

• Apart from these specific provisions in the Treaty and the Statute which require compatibility, there arc likely to exist a number of national provisions - often of a technical nature - which may prove to be at odds with the prerogatives of the ECB vis-a-vis NCBs and which should be eliminated so that the new compatible provisions become effective at the start of Stage Three for Member States without a derogation and at the start of their full participation in Monetary Union for Member States with a derogation initially or with a special status.

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In relation to the application of Article 107 of the Treaty on central bank independence and Article 108 of the Treaty on the adaptation of national legislation and NCBs' statutes, the Treaty does not make a distinction between Member States with or without a derogation (sec Article 109k(3) of the Treaty).

Denmark will be treated as a Member State with a derogation (Article 2, Protocol No 12). Its central bank statute will therefore have to be compatible with Articles 107 and 108.

In the event that the United Kingdom will not participate in Stage Three, Article 2, Protocol No 11 will exempt the United Kingdom from the application of Articles 107 and 108 of the Treaty. Given the formulation of Article 1 09e(5), until it notifies that it intends to move to the third stage, the United Kingdom is therefore exempted from the obligation to start the process leading to the independence of its central bank.

It is made clear in Article 107 that the requirements for compatibility with the Treaty and the Statute arc limited to ESCB-relatcd tasks. Among these arc the basic tasks, laid down in Article 105(2) of the Treaty and Article 3.1 of the Statute, which arc to define and implement the monetary policy of the Community, to conduct foreign exchange operations consistent with the provisions of Article 109 of the Treaty, to hold and manage the official foreign reserves of the Member States and to promote the smooth operation of payment systems.

2.3. Review of national legislation

Central bank statutes reflect different national traditions and institutional frameworks and vary significantly between Member States with respect to many of their characteristics like the legal form of the central bank, the definition of its objectives and tasks, monetary policy instruments, relations with the national parliament and socio-economic groups, the structure and composition of decision-making bodies, and financial rules. Taking Articles 105 and 107 of the Treaty and Article 14.2 of the ESCB Statute as benchmarks, a review of present legislation in the Member States leads to the following conclusion: Many characteristics of national legislation arc within the limits drawn by EC law. However, in a number of cases adaptations are called for. Legislative initiatives for such adaptations have reached an advanced stage in several Member States (sec section 2.4).

In a few Member States, legislation allows other bodies to give instructions to the central bank in matters of monetary policy. This is incompatible with the requirements in the third stage of EMU.

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In a few Member States, the provisions on the security of tenure for the Governor are not compatible with the provisions of Article 14.2 of the ESCB Statute.

The box on "Review of central bank legislation: some illustrative cases" provides examples of provisions in national legislation which serve to illustrate the issues at stake.

2.4 Current legislative initiatives

In Ireland, Luxembourg, the Netherlands, Finland and - with a more substantial revision than in 1993 - in Belgium, preparatory work on amendments to national legislation concerning central banking is well under way.

In Ireland, draft legislation on the Central Bank of Ireland includes provisions on the Bank's involvement in payment systems, the collection of statistics, prudential supervision and the position of the members of decision-making bodies, including the term of office of Directors, which is fixed at five years.

In Luxembourg, a draft law 0n the Institut Monetaire Luxembourgeois and the monetary status of Luxembourg was submitted to Parliament in December 1993. The law which is still pending covers inter alia the IML's objectives and tasks.

In the Netherlands, discussions between the Ministry of Finance and the Nederlandsche Bank with a view to adapting the central bank legislation to the requirements of EMU have reached an advanced stage.

In Finland, draft legislation in particular addresses the future role of the Parliamentary Supervisory Council in monetary policy, the minimum term of office for the Governor and the grounds for dismissal.

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REVIEW OF CENTRAL BANK LEGISLATION: SOME JI.,LUSTRATIVE CASES

Comnliance with Article 107 ofthe Treaty

The following rights of third parties seem to be at odds with or to impinge upon the prohibitions and commitments formulated in Article I 07:

a. A general right to give instructions

Provisions which subordinate NCBs to instructions arc in contradiction with their obligation not to seck or take instructions.

Section 4 of the Bank of England Act2

"The Treasury may from time to time give such directions to the Bank as, after consultation with the Governor of the Bank, they think necessary in the public interest. "

The right to give such ·instructiqns is also incompatible with the Treaty, when the central bank may object but eventually can be defeated.

Article 26 of De Nederlandsche Bank Act

"1. The Minister may, after consultation with the Bank Council, give such directions to the Governing Board as he thinks necessary for the.Bank's policy to be properly co-ordinated with the Government's monetary and financial policies. Except as provided _il.i paragraph 2 below, the Governing Board shall comply ·with such

directions.

2. Jj the Governing Board has any objections to the directions as referred to in paragraph 1 above, it may communicate said objections to the Crown in writing within three days of receiving directions. The Crown shall decide whether or not the directions are to be complied with

3. (. . .)

2 As already indicated, the provisions of Protocol No 11 exempt the United Kingdom from the

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4.

If

the Crown decides that the directions are to be complied with, the Governing Board's objections and the decisions of the Crown shall be published in the Nederlandsche Staatscourant,

if

in the opinion of the Crown this is not contrary to the national interest. "

Article 15 oftlze Act on the Bank of Finland

"The administration of the Bank and management of the affairs thereof shall be under the sun,eil/ance of the Parliamentary SupenJisory Board in accordance with this Act and the Regulations confirmed by Parliament"

Article I 7oft he same Act

"It is the duty of the ParliamentQiy Supervisory Board to fzx the base rate of the bank and other rates of interest applied by the bank and the limits thereof'.'.

b. A right to approve, suspend, annul or defer a NCB's decision

Any such provisions constitute a right to give instructions of a specific type; the assessment is the sanie as for generally formulated rights to give instructions.

Article 13(2) of the Bundesbank Act

"The members of the Federal Cabinet are entitled to attend tlze meetings (lf the Central Bank Council. They have no right to vote, but may propose motions. At their request, a decision shall be deferred for up to two weeks."

c. A right to censor decisions on legal grounds

.A right ofthe Government to control the legality ofdecisions of a central bank seems incompatible with Article 107. This also applies when the Government's right can only be exerted indirectly. ·

Article 43 of the Organic Law of the Banco de Portugal

"1. The Governor shall have a casting vote atthe meeting which he chairs and may suspend tlze effectiveness of tlze decisions. taken by the Board· of Directors or by executive committees which, in his judgement , are contrary to the law, to the in!ercsts of the country or of the bank

2. The suspension shall be notified to the Government, through the Finance Minister, and shall be considered waived, should tlie Cab inc~ not con finn it l1.:ithin fifteen days

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d. A right to participate in decision-making bodies of a NCB with a right to vote.

A right of third parties to vote in decisions related to the tasks of the ESCB as defined in Article 1 05(2) is inconsistent with their commitment not to seck to influence such decisions.

Article 14 of the Central Bank Act of Ireland

"Tiie·Bank shall be conducted and managed in accordance with this Act by a Board of Directors consisting of (a) a Governor and (b) such number of other Directors (not exceeding nine and not including at any time more than two service Directors) as the Minister shall from time to time determine .... Every service Director shall hold office at tlze pleasure of tlze Minister and may be removed by tlze }.finister at any time. "

e. A right to be consulted before a NCB takes a decision

Article 107 of the Treaty does not, of course, preclude cooperation and dialogue between NCBs and government, parliament or other state bodies. In fact the Treaty providt.s for such contacts and reporting in a number of provisions. The point is whether the government avails itself of any formal mechanism of which the purpose is to influence the final decision of the NCB. An explicit duty to consult political bodies prior to the decision provides for such a mechanism and appears not to be compatible with the second sentence of Article 107.

Article 42 ofSveriges Riksbank Act

11

Prior to the Riksbank making a monetary policy decision of major importance, the Cabinet Minister· appointed by the Government shall be consulted. If such co'nsultation is not possible and there is exceptional cause, the Riksbank may make such a decision without consultation. 11

f. A right to control ex ante tlie central bank's budget

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Article 4.2 of the Law of Autonomy of the Banco de Espaiia

"The Bank's draft budget for operating expenses and investments, once approved by its Governing Council according to Article 2J.lg), shall be submitted to the· Government, which will send it to the Spanish parliament for approval. The Bank's budget shall be estimative in nature, and shall not be consolidated with other state public sector budgets."

g. Membership of members of decision-making bodies in bodies outside the ESCB

Membership in external bodies may entail conflicts of interests between the duties vis-a-vis a NCB (for Governors additionally vis-vis-a-vis the ECB) and the external function. However, it appears to be difficult to establish a general mle with respect to compliance or non-compliance of such membership with Article 107. The point in question is whether the member of the NCB body executes other tasks which might jeopardise his personal independence.

Article 22 of the Osterreichische National bank Act

"(3) Only persons holding Austrian citizenship who are not debarred from being elected to the National Council (Nationalrat) may be members of the General Council. The members of the General Co11ncil shall be persons prominent in some branch of economic activity or jurists or economists. They shall include representatives of

1. banks; 2. industry;

3. trade and small businesses; 4. agriculture; and

5. salaried employees and wage-earners.

(4) No person who is in the active service of the Federal Republic or a Land or who is a member of the Nationalrat, the Federal Government or the government of a Land may be a member of the General Council. 171C restriction with regard to persons in the active service of the Federal Republic shall not apply to university professors in law and economics. Not more than jour members of the General Council may in their main occupation be a member of the management of banks; such persons may not be a President or Vice President of the Bank."

Comnliance with Article 14.2 of the ESCB Statute

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a. Tern1 of office for Governors

Article 14.2 of the Statute requires a minimum term of office for Governors, i.e. five years. Consequently, statutes with a shorter term of office need to be revised.

Statutes which do not explicitly provide for a minimum term of office meet the minimum tern1 requirement, provided that the grounds for dismissal arc limited to the cases specified in the second sub-paragraph of Article 14.2 ofthe Statute (see below). Article 29 of the statutes of the Bank of Greece

"The Governor and the Deputy Governors (. .. ) shall be appointed (. .. ) by an Act of the Cabinet, for a period of four years on proposal of the Board of Directors of the Bank( .. )."

The statute of the Banca d'Italia is silent about the term of office of the Governor and -about grounds for dismissal.

Article 19 of the Statute of the Banca d 'Italia

"Tize Board of Directors may appoint and dismiss the Governor, the General Manager and the two Deputy General Managers. "

Article 7 (3) of the Bzmdesb,ank Act

"1Jze President, the Vice-P,resident and the other members of the Directorate are nominated by the Federal Cabinet and appointed by the President of the Federal Republic. Before making such nominations, the Federal Cabinet shall consult the Central Bank Council. Members of the Directorate are appointed for eight years, or in exceptional cases for a shorter tenn of office, but not less than two years.,

b. Grounds for dismissal of a Governor

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Article 12(3) of the Act on the establishment of the lnstitut Monetaire Luxembourgeois

"The Government may propose to the Grand-Duke the dismissal of the Management ·

if

there is a fundamental disagreement between the Government and the Management over the policy of the Institut and the performance of its tasks. In this event, the proposal of dismissal shall relate to the Management collectively. Likewise, the Government may propose to the Grand-Duke the dismissal of a member of the 111anagement who becomes permanently unable to perform his duties. Before transmitting a proposal to the Grand-Duke, the Government shall consult the Council of the lnstitut. "

Article 44 of the Statutes of the National Bank of Belgium

"The governor is appointed and can be dismissed or suspended by the King."

~omnliance with Article 105 of the Treaty

The requirement that the objectives of all members of the ESCB must coincide with Article 105(1) does not imply the need to copy in all instances the wording of this paragraph into national statutes. In fact, the formulation of a central bank's objectives is quite disparate among Member States. This to some extent reflects the fact that central bank statutes date from different decades. HoV\ever, any formulation must avoid casting doubt as to whether the bank in question is bound by the primary objective as laid down in the Treaty.

Article 1 Act n.JJ6 on Danmarks Nationalbank3

"Dmrmarks Nationalbank shall have the object to maintain a safe and secure currency system in this country, and to facilitate and regulate the traffic in money and the extension of credit. "

3 Since Dc1im:nk has notified the Council that it will not participate in the third stage, there is no

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Further statutory requirements to be fhlfilled for NCBs to become an integral Qart of the ESCB

According to Article 14.3 ofthe Statute, national central banks are an integral part of the ESCB and shall act in accordance with the guidelines and instructions of the ECB. The scope of necessary adaptations of national law - either in central bank statutes or in other parts of law - which this principle implies will emerge more clearly in the process of preparatory work for the ECB' s regulatory framework. It is obvious that national peculiarities may continue to exist to the extent that the effectiveness and uniformity of the single monetary policy are not affected.

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3. PRICE STABILITY 3.1 Treaty provisions

The price stability criterion is defined in the first indent of Article 109j(l) ofthe Treaty: "The achievement of a high degree of price stability [ . .} will be apparent from a rate of inflation which is close to that of, at most, the three best performing Member States in terms of price stability."

Protocol No 6 on the convergence criteria develops Article 1 09j(1 ), by stipulating in Article 1 that a Member State is convergent in terms of inflation if it "has a price performance that is sustainable and an average rate of inflation, observed over a period of one year before the examination, that does not exceed by more than 1 ~percentage points that of. at most, the three best pe1jorming ·Member States in terms of price stability. Inflation shall be measured by means of the consumer price index on a comparable basis, taking into account differences in national definitions. "

National consumer price indices (CPis) diverge substantially in terms of concepts, methods and practices. Thus, to meet the requirement of Protocol No 6 that inflation must be measured on a comparable basis, the Council adopted on 23 October 1995 a framework Regulation (No 2494/95) which provides for a harmonisation of national CPis in two steps.

The first step required for the purpose of the report referred to in Article 109j(I), i.e. the present document, was the production by March 1996 of a se( of so-called "interim indices of consumer prices" (IICPs), adjusted to reduce differences in coverage of goods and services observed between existing national indices.

The monthly IICPs have been published as from January 1996 with the time series going back to January 1994. As a first step in the harmonisation process, IICPs exclude those categories of the national indices for which existing practices differ most markedly across Member s·tates. As such, IICPs do not include imputed rents of owner-occupied housing, health and educational services, and various other items like mortgage interest payments, financial services, insurance, package holidays and certain local authority services. On the other hand, IICPs incorporate some components, such as prices of alcohol and tobacco, which arc . excluded from the national CPis in some Member States. Thciugh not strictly comparable, IICPs arc for the time being considered to constitute a more comparable basis for the assessment of inflation convergence among Member States than the national CPis.

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3.2 Price stability as assessed by the IICPs 3.2.1 Recent trends

The time series for the IICPs are available only from January 1994. As a result, the analysis of the inflation trend based on this index cannot start before January 1995. Since early 1995, a general tendency towards lower and more convergent inflation has prevailed. Inflation in the Community as a whole as measured by the IICP (percentage change on a year earlier) stood at 2.8% in January 1995 and declined to 2.4%_ in September 1996. This figure is historically low and not £1r from what could be called price stability.

In the seven Member States where the annual inflation rate was below 2.5% in January 1995 (Belgium, Denmark, Germany, France, Luxembourg, the Netherlands and Finland), the pace of price increases either eased further or stabilised at a low level during the subsequent 20 months (see Graph 3.1 ). In three of the four countries where the annual inflation rate ranged between 2.5% and 3% at the beginning of 1995 (Ireland, Austria and Sweden, the exception being the United Kingdom), it edged down to below 2% in mid-1996. The deceleration was most noticeable in Sweden where the annual inflation rate cased to below 1% since August of this year. In the United Kingdom, progress towards price stability has proved to be gradual and somewhat erratic, but the downward trend has been confirmed during the course of 1996, despite the context of a sustained recovery and earlier downward pressure on sterling.

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---1----

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3.2.2 Price convergence measured against a reference value

[image:22.561.22.489.119.814.2]

. In this report, the following operational definitions have been used (for a discussion of the issues involved see the box on the "Calculation of the infl~tion reference value"). A Member Table 3.1

Inflation convergence

(inflation measured by the percentage change in the JICP)

Interim indices of consumer prices Three best December September performers 1995 (I) 1996 (I).

B 1.4

-D

-

1.3

NL 1.1 1.2

FIN 1.0 0.9

Reference 2.7 2.6

value(2)

Member States respecting the reference value

Number: 9 10

out of: 15 15

B 1.4 1.6

DK 2.3 2.2

D 1.5 1.3

F 1.7 2.1

IRL{3) 2.4 2.1

L 1.9 1.3

NL· 1.1 1.2

A 2.0 1.7

FIN 1.0 0.9

s

-

1.6

(I) Measured by the percentage change in the arithmetic average of twelve monthly indices relative to the arithmetic average of the nvelve monthly indices of the previous period. (2) Definition adopted in this report:

arithmetic average of the three best' performers in terms of inflation plus 1.5 percentage 'points.

(3) Measured on the basis of quarterly data

Sourer: Commission services.

State's inflation is measured by the percentage change in the arithmetic average of twelve monthly indices relative to the arithmetic average of the twelve monthly indices of the previous period 1. The reference value is calculated as the arithmetic average of the inflation rates of the three best performing Member States plus 1.5 percentage points.

Over the period for which a reference value can be calculated2, the reference value declined marginally

from 2.7% in December 1995 to 2.6% in

September 1996 (see Table 3.1). Over the period concerned, the composition of the reference group of the three best performers shows little change. The Netherlands and Finland have invariably been part of the group whereas Germany replaced Belgium as from June 1996.

In September 1996, ten Member States had an average inflation rate below the reference value (Belgium, Denmark, Germany, France; Ireland3, Luxembourg, the Netherlands, Austria, Finland and Sweden), while in two other countries (Portugal and the United Kingdom), the average inflation. rate was 0.4 percentage points above the reference value. Iri

Spain and Italy, the average inflation rate exceeded the reference value by 1.2 percentage points and 2.1 percentage points, respectively. In the case of Greece, the gap from. the reference value amounted to 5.8 percentage points (see Table 3.2)

It should be noted that this measure is different from that usually referred to as the inflation rate (calculated as the percentage change in an index in the latest month over the index of 12 months before), which has been used in Section 3.2.1. and Graph 3.1.

2

3

1l1e time series for the IICP are available only from January 1994. As a result, the earliest reference value which can be calculated is for' December 1995.

(23)
[image:23.566.58.519.74.786.2]

Table 3.2

The avera~e rate of inflation (measured by IICP; percentage change)

Interim indices of consumer _11riccs

December September

1995(l) 1996(l)

B 1.4 l.G

DK 2.3 2.2

D 1.5 1.3

EL 9.0 8.4

E 4.7 3.8

F 1.7 2.1

IRL (2) 2.4 2.1

I 5.4 4.7

L 1.9 1.3

NL l.l 1.2

A 2.0 1.7

r 3.8 3.0

FIN 1.0 0.9

s

2.9 l.G

UK 3.1 3.0

EUR 3.0 2.7

(1) Measured by the percentage change in the

arithmetic average of twelve monthly indices relative to the arithmetic average of the twelve monthly indices of the previous period.

(2) Measured on the basis of quarterly data

Source: Commission services .

The convergence situation was better in September 1996 than in December 1995, when nine countries enjoyed average inflation rates below the reference value, and when the distance from the reference value in the other countries was larger than is currently the case.

. I

Grap 11 3·2 I•··· ••...•••.•.•.

J.it·t"~*illl···ittdi¢c~····()f. ·~·O.llSll.Jll·~i'····P~~·H¢~····(IlQ~)···•••••••••••••·••···••••••·.·•·•···••••··•·•···

··· .. .

··•·•··· ·.·.. i

i(Ari tl1nibH8

avdr,Jgc

hd~~~~'t; in~~thlrindice~ J'dGm;dto.t!l~··dl'ithtllg{id h~·~rade

oftttd \

< ... .

···•··· · ···• •····.··· ··.· / < . t,v~Ivc n1onthlyindiccs ()fthC Prc~£dinr, period) · · · · · · · · .·.·· · ·· · · ···

(24)

3.3 Inflation performance during the second stage of EMU

The limited time-span covered by the IICPs does . not allow more recent inflation developments to be seen in perspective. To ensure a comprehensive and balanced examination of the degree of price stability and the sustainability of the inflation performance, some other inflation indicators must be considered, including private consumption deflators and CPis. . . The box on the "Differences between II CPs and CPis" examines the scale of such differences. Developments with regard to private consumption deflators and CPis confirm that substantial progress i~ inflation convergence has been achieved in the Community since the start of Stage Two of EMU on 1 January 1994. Between 1993 and 1995, inflation for the Conimunity as a whole, fell from 4% to 3%, as measured by the private consumption deflator, and from 3~%

to 3%, as measured by the CPl. This downward trend has continued in 1996, with inflation in the Community on av~rage expected to be just over 2Y2% on both measures this year (sec Table 3.3).

At the country level, the picture painted by the evolution of the private consumption deflator and the CPI is similar to that outlined by the llCPs. The decline in inflation is observed in all the Community countries, although to varying degrees. During Stage Two, Member States which have long participated in the exchange-rate mechanism (ERM) (Belgium, Denmark, Germany, France, Ireland, Luxembourg and the Netherlands) have consolidated their already good initial inflation performances, while the three new Member States (Austria, Finland and Sweden) have converged in terms of price stability towards this first group.

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[image:25.563.53.488.24.780.2]

Table 3.3

Private consumption deflator and consumer price index (national currency, percentage change)

Private consumption Consumer price index deflator

1993 1994 1995 1996 1993 1994 1995 Sep.96

(I) (2)

B 3.0 3.2 1.6 2.0 2.8 2.4 1.5 1.8

DK 0.3 1.7 2.1 2.0 1.3 2.0 2.1 2.0

D 3.9 2.7 2.0 1.8 3.6 2.7 1.8 1.6

EL 13.7 10.8 9.3 8.5 14.4 10.9 9.3 8.6

E 5.5 4.9 4.7 3.6 4.6 4.7 4.7 3.8

F 2.2 2.1 1.7 1.9 2.1 1.7 1.8 2.1

IRL 1.9 2.6 2.0 2.0 1.4 2.3 2.6 1.8

I 5.4 4.6 5.8 3.9 4.5 4.0 5.2 4.6

L 7.0 2.4 2.0 1.7 3.6 2.2 1.9 1.3

NL 2.1 2.7 0.9 1.9 2.6 2.8 1.9 1.9

A 3.4 3.0 2.3 2.0 3.6 3.0 2.2 1.8

p 7.1 4.8 4.2 3.3 6.4 5.2 4.1 3.3

FIN 4.2 1.4 0.2 0.9 2.2 1.1 1.0 0.5

s

5.7 3.1 2.7 1.7 4.6 2.2 2.5 1.2

UK 3.5 2.5 2.6 2.5 1.6 2.5 3.4 2.6

EUR 4.1 3.3 3.0 2.6 3.4 3.1 3.1 2.7

CV 0.73 0.63 0.75 0.66 0.85 0.68 0.66 0.74 CVER11 0.62 0.35 0.48 0.34 0.49 0.40 0.41 0.43 CV

Non-ERM 0.59 0.59 0.76 0.63 0.81 0.63 0.67 0.66

(1) Autumn 1996 economic forecasts.

(2) Measured by the percentage change in the arithmetic avernge of twelve monthly indices rclative to arithmetic average of the twelve monthly indices of the previous period.

CV

=

Coefficient of variation (ratio of the standard deviation to the mean of the data).

CV ERMis the coefficient of variation for; B, DK, D, E, F, IRL, L, NL, P for 1993 and 1994. A is included in 1995 and 1996. FIN is included in 1996.

TI1e Non-ERM includes EL, I, UK for 1993 and 1994. FIN and S are included in the CV Non-ERM for 1995 and S also for I 996.

Source: Commission services.

In the remaining Member States (Spain, Greece, Italy and Portugal), a clear improvement has been observed since 1993, but in Spain and Portugal the downward trend in inflation was interrupted in the spnng of 1996.

The generalised reduction in inflation throughout the

Community has been

accompanied by a . narrowing in inflation differentials between Member States. One indication of how inflation in the Member States has tended to converge is provided by the coefficient of variation4 , a statistical measure of . dispersion. The coefficient of variation for inflation, measured by the private consumption deflator, declined from 0.73 in 1993 to

0.66 m 1996 for the

Community as

a

whole. The convergence process has been even greater within the ERM group, with the coefficient of variation declining from 0.62 in 1993 to 0.34 in 1996. On the other hand, substantially greater variability continues to characterise inflation within the non-ERM group.

4 The coefficient ofvariation shows the dispersion ofindividua1 Member State's inflation around the average

(26)

3.4 The sustainability of price convergence

The process of inflation convergence which has been evident in the Community for more than a decade results in large part from fundamental changes in the attitude of all economic actors towards inflation.

The most important structural change has undoubtedly been the determined implementation of monetary policies targeted at price stability. Several Member States have adopted explicit inflation targets, or indirect objectives (like a money growth target or an exchange rate target), and accordingly they have conducted their monetary policies credibly.

Institutional changes such as the prohibition of central bank financing of budget deficits and the prohibition of privileged access of the public sector to financial institutions (which entered into force with the start of Stage Two) as well as the granting of independence to central banks (as required by the Treaty by the end of Stage Two, see Chapter 2) have helped to strengthen the effectiveness and credibility of a stability-oriented monetary policy in the Member States.

Besides its direct effect on inflation," monetary policy also exerts a curbing impact on price increases through its influence on economic agents' behaviour. By remaining firm on an anti-inflation policy, monetary authorities raise the credibility of price stability objectives and strongly contribute to . reduce inflation expectations. Nominal wage moderation has been progressively achieved over the past !en years (see section 7.4.1). This trend suggests that the Social Partners have increasingly internalised the price-stability objective in their wage settlements.

But other key structural factors have contributed importantly to the low inflation environment currently prevailing in the Community. The completion of the .single market has exerted - and will continue to do so - dowriward pressure on price inflation at the firm and sectoral level mainly through two channels.· Firstly, the removal of national trade barriers has increased competition .in many markets for goods and services, with a subsequent squeeze of rents which resulted from imperfect market situations. Secondly, greater competition has also induced a more efficient allocation of resources within the Community, fostering the efficiency of the supply side. Production costs h·ave thus been curbed, with an obvious downward impact on prices.

(27)
(28)

CALCULATION OF THE INFLATION REFERENCE VALUE

Protocol No 6 states that the inflation reference value should be calculated on the basis of "an average rate of inflation, observed over a period of one year of, at most, the three best performing States".

As to the question of the average, in this report preference is given to an arithmetic average as opposed to a geometric one as it is the most commonly used method. Furthermore, the difference between the arithmetic and geometric average is very small, especially if inflation is low.

Regarding the period of one year, two main approaches are possible: either using the year-on-year change of a monthly indicator (for instance, September I 996/September I 995), or using the average change of the last twelve months over the preceding twelve months. The advantage of the first approach is that it is straightforward and easy understandable. But disadvantages outweigh this advantage. Indeed, results may vary importantly from month to month, because of possible base effects due for instance to changes in indirect taxes. Furthermore, and more importantly, as the criterion should assess the sustainability of price stability and of inflation convergence, taking into account a longer period seems more appropriate.

Concerning the number of countries to be included in the calculation of the reference value, different approaches arc conceivable. A first group takes one country to calculaate the reference value:

Method 1: the best performing country+ 1.5 percentage points.

Method 2: the second best performing country+ 1.5 percentage points.

Method 3: the third best performing country + 1.5 percentage points.

A second group of interpretations would take an average of two or three countries:

Method 4: im uml'eighted m'erage of the two best performing countries + 1.5 percentage points.

Method 5: the um1'eighted average of the three best pe1jorming countries + 1.5 percentage points.

(29)
[image:29.564.52.518.47.573.2]

Table 3.4

Inflation com·ergence according to alternath·e methods for the calculation of the reference value,

ncr

December 1995 OJ Scp_tember 1996 (IJ

Number of Number of

Reference member states Reference member states \'alue respecting the value respecting the reference value reference value

(:\) (3)

1. 1l1e best perfonning country

2.5 9 2.4 10

+1.5 percentage points.

2. TI1e second best performing country

2.6 9 2.7 10

+ 1.5 percentage points. '

3. TI1e third best performing country

2.9 9 2.8 10

+ 1.5 percentage points.

4. The two best performing countries,

2.5 9 2.6 10

unwcighted average + 1.5 percentage points.

5. TI1e three best performing countries, 2.7 9 2.6 10 unweighted average

+ 1.5 percentage points.

6. The three best perfonning countries,

weighted<2l average+ 1.5 percentage 2.7 9 2.8 10

points.

(1) Measured by the percentage change in the arithmetic average of twelve monthly indices relative to the arithMetic average of the twelve monthly indices of the previous period.

(2) Weighted according to shares of private consumption in 1995 at current prices, PPS.

(3) 9 countries respecting the reference value in December 1995: B, DK, D, F, IRL, L, NL, A, FIN. 10 countries respecting the reference value in September 1996: B, DK, D, F, IRL, L, NL, A,. FIN, S.

Soura: Commission services.

A reference value has been calculated according to these six methods both for December 1995 and for September 1996. For the purpose of this report, the Commission has adopted method 5. Table 3.4 shows that the number of countries with inflation below the reference value is the same, both in December 1995 and in September 1996, whatever the method used. These results may be explained by two factors. First, there is an important group of countries which has achieved low and convergent inflation in a sustained way. As a result, neither the number of countries taken into account nor the composition of the reference group has a major effect on the magnitude of the reference value. Secondly, the inflation performance of the remaining Member Stat.es is still too distant from the low inflation group such that small variations in the reference value do not a1

(30)

DIFFERENCES BETIVEEN IICPS AND CPJS

The differences between IICPs and CPis depend very much on the existing structure of national CPis.

For countries where the CPis incorporate items like health care or imputed rents on owner-occupied housing, the IICPs will tend to be lower than the CPis as the prices of these items tend to rise faster than those of internationally traded goods. On the other hand, for countries where alcohol and tobacco prices are excluded from the CPis, the difference with the IICPs will be positive as price increases on these goods are typically higher than average. Countries where mortgages are included . in the national CPis will sec erratic differentials. At the Community level and for a number of countries, differences between the CPI and the IICP are minor, with the discrepancy in the range of ±0.1 percentage point to ±0.3 percentage point (see Table 3.5). But for some countries, differences vary from ±112 percentage point to nearly

[image:30.564.27.509.355.793.2]

1 percentage point (Ireland, the Netherlands, Finland, Sweden and the United Kingdom).

Table 3.5

Difference between llCPs and CPis (percentage change)

1995(!) March 1996(2! September 1996(2

)

llCP CPI Difference llCP CPI Difference llCP CPI Difference

llCP-CPI llCP-CPI llCP-CPI

B 1.4 1.5 -0.1 1.7 2.0 -0.3 2.1 1.9 0.2

DK 2.3 2.1 0.2 2.3 2.1 0.2 2.5 2.3 0.2

D 1.5 1.8 -0.3 1.4 1.7 -0.3 1.3 1.4 -0.1

EL 9.0 9.3 -0.3 8.9 9.1 -0.2 8.1 8.5 -0.4

"E 4.7 4.7 0.0 3.4 3.4 0.0 3.6 3.6 0.0

F 1.7 1.8 -0.1 2.5 2.3 0.2 1.6 1.6 0.0

lRL (3) 2.4 2.6 -0.2 2.1. 2.0 0.1 2.2 1.4 0.8

I 5.4 5.2 0.2 4.4 4.5 -0.1 3.5 3.4 0.1

·L 1.9 1.9 0.0 1.3 1.2 0.1 1.5 1.4 0.1

NL 1.1 1.9 -0.8 1.5 2.1 -0.6 1.4 2.0 -0.6

A 2.0 2.2 -0.2 1.8 1.8 0.0 2.2 2.0 0.2

p 3:8 4.1 -0.3 2.1 2.4 -0.3 3.2 3.4 -0.2

FIN 1.0 1.0 0.0 1.1 0.6 0.5 1.2 0.6 0.6

s

2.9 2.5 0.4 1.5 1.5 0.0 0.6 -0.1 0.7

UK 3.1 3.4 -0.3 3.0 2.7 0.3 2.9 2.1 0.8

EUR 3.0 3.1 -0.1 2.7 2.7 0.0 2.4 2.3 0.1

( 1) Annual percentage change.

(2) Percentage on a year earlier, Tff-12. (3) Measured on the basis of quarterly data.

(31)

Table 3.6

Inflation com•ergence using IICPs and CPis (percentage change)

Interim indices of Consumer Price Index consumer prices (I) (1)

Three best Dec. Sep. Dec. Sep.

perfonners 1995(l) 199G(I) 1995(l) 199G(I)

B 1.4 - 1.5

-D

-

1.3

-

-F

-

-

1.8

-NL 1.1 1.2

-

-L

-

-

-

1.3

FIN 1.0 0.9 1.0 0.5

s

-

-

-

1.2

Reference 2.7 2.6 2.9 2.5

valueC2)

Member States respecting the reference value

Number: 9 10 10 lO

Out of: 15 15 15 15

B 1.4 1.6 1.5 1.8

DK 2.3 2.2 2.1 2.0

D 1.5 1.3 1.8 1.6

F 1.7 2.1 1.8 2.1

IRL (3) 2.4 2.1 2.6 1.8

L 1.9 1.3 1.9 1.3

NL l.l 1.2 1.9 1.9

A 2.0 1.7 2.2 1.8

FIN 1.0 0.9 1.0 0.5

s

-

1.6 2.5 1.2

(I) Measured by the percentage change in the aritlunetic average of twelve monthly indices relative to aritlunetic average oftl1e t\\•e!ve monthly indices of the previous period.

(2) Definition adapted in this report: aritlunetic average of the tlrree best perfonners in tenns of inflation plus 1.5 percentage points.

(3) Measured on the basis of quarterly data.

[image:31.557.42.534.35.805.2]

Source: Conrrnission services.

(32)

4. GOVERNMENT BUDGETARY POSITION 4.1 Existence of an excessive deficit

Fulfilment of the criterion on the sustainability of the government financial position depends, as the second indent of Article 109j(1) makes clear, on a Member State having achieved a government budgetary position without a deficit that is excessive as determined in accordance with Article 104c(6). Protocol No 6 on the convergence criteria further states, in Article 2, that:

"The criterion on the government budgetary position referred to in the second indent of Article 109}(1) of this Treaty shall mean that at the time ofthe examination the Member ·State is not the subject of a Council decision under Article I 04c(6) of this

Treaty that an excessive deficit exists".

The role of this report, therefore, is not to make an independent assessment of whether or not Member States currently fulfil the criterion on the government budgetary position. This is already determined by the Council decisions. on the existence of an excessive deficit. The first section of this chapter .describes the application of the excessive deficit procedure during the second stage of EMU and the decisions on the existence of an excessive deficit which are currently in force. In the remaining sections of this chapter recent budgetary developments in the Member States are reviewed.

The provisions of the excessive deficit procedure (Article 1 04c with the exception ·of paragraphs 1, 9, 11 and 14, together with the associated Protocol.(No 5)) have applied since the begi~ng of the second stage of EMU' in January 1994. The practice since then has been for the Commission and Council to implement the procedure on an .annual basis. Each year the various steps of the procedure have been applied following the March reporting of budgetary data by Member States (as required by Council Reglilation (EC) No 3605/93). The box on the "Excessive deficit procedure" describes the main features of the procedure during the second stage.

In the first application of the ·procedure in 1994 the Council decided! in accordance with Article 1 04c( 6) on the existence of an excessive deficit in ten of the then twelve Member States. Only Ireland and Luxembourg were not the subject of such a decision: in Ireland the government deficit was below the reference value of3% ofGDP and the government debt ratio, while above the reference value of 60% of GDP, had been declining significantiy; in Luxembourg the government balance was in surplus and the debt ratio was £1r below the reference value. All the other ten Member States were judged not to satisfy one or both of the criteria for government deficit and debt.

In 1995 the procedure was applied for the fi~st time to the three new Member States (Austria, Finland and Sweden) and the Council decided2 that an excessive deficit

2

Council decisions of .26 September 1994. None of the documents for the application of the procedure has been published in the Official Journal.

(33)

existed in each of them. At the same time the Council decided3 in accordance with Article 104c(12) to abrogate the decision on Germany: the government deficit in Germany had fallen below the reference value in 1994 and was expected then to remain below in 1995, and the government debt ratio remained below the reference value.

In the application ofthe procedure in 1996 the Council adopted a new decision4 on the existence of an excessive deficit in Germany: as it had turned out, the government deficit in Germany rose above the reference value in 1995 and was expected to remain above in 1996. The Council also decided5 to abrogate the decision on Denmark: the

government deficit in Denmark fell well below the reference value in 1995 and was expected to remain at a low level in 1996, and the government debt ratio, while still above the reference value, declined significantly in 1994 and 1995.

Thus twelve Member States arc currently the subject of a Council decision that an excessive deficit exists. At present, only three Member States (Denmark, Ireland and Luxembourg) are not the subject of such a decision and so fulfil the criterion on the government budgetary position.

4.2 Budgetary developments in 1996

Efforts at budgetary consolidation in 1996 have been made within the context of a pause in economic growth. The Commission services forecast real GDP growth of

1.6% this year for the European Union as a whole, and growth rates below this

3

4

5

(34)
[image:34.558.34.465.227.618.2]

average arc expected for Belgium, Germany, France, Italy and Austria. Despite the unfavourable economic climate almost all Member States are expected to make further progress in reducing government deficits in I 996. According to the latest forecasts of the Commission services (see Table 4. I and Graph 4.1 ), only Germany is likely to sec a widening of its deficit in I 996. In all the other Member States and in the European Union as a whole the deficit is expected to decline (in Luxembourg, the surplus is likely to be smaller). Particularly large reductions in the deficit of more than I% of GDP are likely in Greece, Spain, the Netherlands, Austria, Portugal, Finland, Sweden and the United Kingdom.

Table 4.1

General government deficit

(% ofGDP)

1993 1994 1995

B 7.5 5.1 4.1

DK 3.9 3.5 1.6

D 3.5 2.4 3.5

EL 14.2 12.1 9.1

E 6.8 6.3 6.6

F 5.6 5.6 4.8

IRL 2.4 1.7 2.0

I 9.6 9.0 7.1

L (2) -1.7 -2.6 -1.5

NL 3.2 3.4 4.0

A 4.2 4.4 5.9

p 6.9 5.8 5.1

FIN 8.0 6.2 5.2

s

12.3 10.8 8.1

UK 7.8 6.8 5.8

EUR 6.2 5.4 5.0

(1) Autumn 1996 economic forecasts. (2) Negative sign indicates a surplus

Source: Commission services.

: 1996(1) 3.3 1.4 4.0 7.9 4.4 4.0 1.6 6.6 -0.9 2.6 4.3 4.0 3.3 3.9 4.6 4.4

On present estimates, it seems likely that in 1996 one more

Member State (the

Netherlands) will succeed in reducing its deficit to below the 3% of GDP reference value, thus joining the three Member States which have

already achieved this

- Denmark, Ireland and Luxembourg (in surplus). Two Member States (Belgium and Finland) arc likely to achieve a deficit of between 3% and 3V2% of GDP this year and a further stx (Germany, Spain, France,

Austria, Portugal and

Sweden) are expected to have a deficit below 4Y2% ofGDP.

(35)
[image:35.563.54.534.48.785.2]

Table 4.2

General government gross debt

(% ofGDP)

Level Change

1993 1994 1995 1996 (1) 94/93 95/94 96195

B 137.0 135.0 133.7 130.6 -2.0 -1.3 -3.1

DK (2) 80.1 76.0 71.9 70.2 -4.1 -4.:. -1.7

D (3) 48.2 50.4 58.1 60.8 2.2 7.7 2.7

EL 111.8 110.4 111.8 110.6 -1.4 1.4 -1.2

E 60.5 63.1 65.7 67.8 2.6 2.6 2.1 F 45.6 48.4 52.8 56.4 2.8 4.4 3.6

IRL 94.5 87.9 81.6 74.7 -6.6 -6.3 -6.9 I 119.3 125.5 124.9 123.4 6.2 . -0.6 -1.5

L 6.2 5.7 6.0 7.8 -0.5 oj . 1.8

NL 80.8 77.4 79.7 78.7 -3.4 2.3 -1.0

A 62.8 65.1 69.0 71.7 2.3 3.9 2.7

p 68.2 69.6 71.7 71.1 1.4 2.1 -0.6 FIN 57.3 59.5 59.2 61.3 2.2 .;.Q.3 2.1

s

76.0 79.3 78.7 78.1 3.3 -0.6 -0.6 UK 48.5 50.4 . 54.1 56.3 1.9 3.7 2.2

EUR 66.1 68.1 71.3 73.5 2.0 3.2 2.2

(l)Autunm 1996 economic forecasts.

(2) Government deposits with the central bank, government holdings of non-governmental bonds and public enterprises related debt amounted to some 18 percent of GDP in 1995.

(3) TI1e sharp increase in the German debt ratio in 1995 is mainly caused by the take-over by the government of off-budget unification-related liabilities, the.most important of which is the debt of the "Treuhandanstalt".

Source: Commission services.

At the end of 1996 the debt ratio is expected by the Commission

services to be below the 60% of GDP reference value in

three ~ember

States France, Luxembourg and

the. United

Kingdor:1.· The debt ratio is hkely to rise to just above the

60% level m

Germany and

Finland and to be in · the range between 60 and 70% of GDP also in Spain. In Denmark, Ireland, the Netherlands, Austria, Portugal and Sweden the debt ratio is likely to be in the range between 70 and

80% of GDP;

Finally, m three

(36)

4.3 Progress with budgetary consolidation during the second stage of EMU At the beginning of the second stage of EMU budgetary positions in most Member States were in very serious imbalance; deficits had risen in many cases to record levels in 1993 as a result of the· sharp recession and debt ratios were on an upward trend in all Member States except lreland.and Luxembourg.

During the last three years efforts by Member S~ate governments at budgetary consolidation have been intensified on a broad front. There has been a rising awareness of the risks for inflation, interest rates and economic growth from uncorrected budgetary imbalances generating debt trends which are very difficult to reverse. During this period financial markets have tended more clearly to attach a risk premium to countries with untackled budgetary problems. In addition, policy in the Member States has drawn support from the need for a high degree of convergence in view of the single currency.

All the Member States with high levels of deficits .have adopted ambitious medium-term programmes for budgetary consolidation. Reducing budgetary imbalances is at the core of the convergence programmes presented by Member States at Community level.

Although in several cases progress has not been as rapid as originally planned and there have been a few setbacks, the experience since 1993 in most Member States has been one of steady narrowing of government deficits (see Table 4.1 and Graph 4.3). The only exceptions arc Germany, where after the deficit declined in 1994 it has risen again in both 1995 and 1996, Spain, wher~ the deficit increased in 1995 before declining again in 1996, the Netherlands, where the deficit widened in 1994 and 1995 before declining in 1996, and Austria, which also saw its deficit continue to rise in 1994 and 1995 before a reduction in 1996. The surplus in Luxembourg has fluctuated from year to year.

EspeCially large deficit reductions of over 4% of GDP have been achieved between 1993 and 1996 in Belgium, Greece, Finland and Sweden, while reductions of between 2% and 4% of GDP have been seen in Denmark, Spain, Italy, Portugal and the United Kingdom. Nonetheless many of these countries started from very high deficits and have not yet reach~d satisfactory deficit levels. Although the short-term focus is on bringing deficits down to

3%

of GDP, this has to be seen as only a step on the way towards re-establishing sound budgetary positions. As shown by the recent discussions about a stability pact on which proposals were adopted by the Commission on 16 October 1996, the 3% of GDP deficit reference value is to be considered not as a target but as a ceiling; it would be appropriate for Member States to aim in the medium term for budgetary positions close to balance or in surplus so as tu foster growth and

Figure

Table 3.1 Inflation convergence State's inflation is measured by the percentage change in the arithmetic average of twelve monthly indices relative to the arithmetic average of the twelve
Table 3.2 The avera~e rate of inflation The convergence situation was better in September 1996 than in December 1995, when nine countries enjoyed average inflation rates below the
Table 3.3 Private
Table 3.4 Inflation com·ergence according to alternath·e methods for the calculation of the reference value, ncr
+7

References

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S'il est vrai que d'après l'exposé des motifs, les postes demandés pour la direction générale des affaires éco~omiques et financières et sont plus directement

the following algorithms with Equilibration I and high precision of 10 − 14 of relative gap: PE, GP, ISP, B and TAPAS with various options for line search and direction of

The competent authorities within the Community will, automatically and without delSiY', accept imports of textile products on submission of the importer's

Extractable protein per ha significantly increased in lucerne and grass species with increasing maturity and was by far the highest in red clover (ranging between 514 and 726 kg ha −1

Sexuality-related attitudes significantly modulate demographic variation in sexual health literacy in Tasmanian

This study investigated the relationship between organisational commitment and communication climate in two organisations experiencing change.. Emphasis was placed on personal